16 Managerial Accounting Concepts and Principles

16 Managerial Accounting Concepts and Principles
C H A P T E R Managerial Accounting Concepts and Principles Financial and Managerial Accounting 13e Warren Reeve Duchac human/iStock/360/Getty Images

LO4: Describe the uses of managerial accounting information.
Learning Objectives LO1: Describe managerial accounting and the role of managerial accounting in a business. LO2: Describe and illustrate the following costs: direct and indirect costs; direct materials, direct labor, and factory overhead costs; and product and period costs. LO3: Describe and illustrate the following statements for a manufacturing business: balance sheet, statement of cost of goods manufactured, and income statement. LO4: Describe the uses of managerial accounting information. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Differences Between Managerial and Financial Accounting (slide 1 of 4)
Accounting information is often divided into two types: Financial accounting Managerial accounting ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial Accounting and Managerial Accounting
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial accounting information is reported at fixed intervals (monthly, quarterly, yearly) in general-purpose financial statements. These financial statements—the income statement, retained earnings statement, balance sheet, and statement of cash flows—are prepared according to generally accepted accounting principles (GAAP). These statements are used by external users such as the following: Shareholders Creditors Government agencies The general public ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Managerial accounting information is designed to meet the specific needs of a company’s management. This information includes the following: Historical data, which provide objective measures of past operations Estimated data, which provide subjective estimates about future decisions Management uses both types of information in: Directing daily operations Planning future operations Developing business strategies ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Unlike the financial statements prepared in financial accounting, managerial accounting reports do not always have to be: Prepared according to generally accepted accounting principles (GAAP). This is because only the company’s management uses the information. Also, in many cases, GAAP are not relevant to the specific decision-making needs of management. Prepared at fixed intervals (monthly, quarterly, yearly). Although some management reports are prepared at fixed intervals, most reports are prepared as management needs the information. Prepared for the business as a whole. Most management reports are prepared for products, projects, sales territories, or other segments of the company. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Management Accountant in the Organization (slide 1 of 5)
In most companies, departments or similar organizational units are assigned responsibilities for specific functions or activities. The operating structure of a company can be shown in an organization chart. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Partial Organization Chart for Callaway Gold Company

The departments in a company can be viewed as having either of the following: Line responsibilities Staff responsibilities ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A line department is directly involved in providing goods or services to the customers of the company. For Callaway Golf (see slide 9), the following occupy line positions: Senior Vice President—Equipment Plant Manager—Chicopee, MA Plant Senior Vice President—Callaway Brand Managing Director, Callaway Golf Europe ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A staff department provides services, assistance, and advice to the departments with line or other staff responsibilities. A staff department has no direct authority over a line department. For Callaway Golf (see slide 9), the following are staff positions: Senior VP—Chief Administrative Officer Vice President, Human Resources Chief Financial Officer Controller ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

In most companies, the controller is the chief management accountant. The controller’s staff consists of a variety of other accountants who are responsible for specialized accounting functions such as the following: Systems and procedures General accounting Budgets and budget analysis Special reports and analysis Taxes Cost accounting ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Managerial Accounting in the Management Process
The management process has the following five basic phases, which interact with one another: Planning Directing Controlling Improving Decision making ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Management Process

Planning may be classified as follows:
Management uses planning in developing the company’s objectives (goals) and translating these objectives into courses of action. Planning may be classified as follows: Strategic planning, which is developing long-term actions to achieve the company’s objectives. These long-term courses of action are called strategies, which often involve periods of 5 to 10 years. Operational planning, which develops short-term actions for managing the day-to-day operations of the company. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Directing The process by which managers run day-to-day operations is called directing. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Controlling Monitoring operating results and comparing actual results with the expected results is controlling. This feedback allows management to isolate areas for further investigation and possible remedial action. The philosophy of controlling by comparing actual and expected results is called management by exception. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Improving Continuous process improvement is the philosophy of continually improving employees, business processes, and products. The objective of continuous process improvement is to eliminate the source of problems in a process. In this way, the right products (services) are delivered in the right quantities at the right time. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Decision Making Inherent in each of the preceding management processes is decision making. In managing a company, management must continually decide among alternative actions. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Management Process Three phases of the management process are planning, controlling, and improving. Match the following descriptions to the proper phase. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Guitar-Making Operations of Legend Guitars

Direct and Indirect Costs (slide 1 of 2)
A cost is a payment of cash or the commitment to pay cash in the future for the purpose of generating revenues. In managerial accounting, costs are often classified according to the decision-making needs of management. For example, costs are often classified by their relationship to a segment of operations, called a cost object. A cost object may be a product, a sales territory, a department, or an activity, such as research and development. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Direct and Indirect Costs (slide 2 of 2)
Costs identified with cost objects are either direct costs or indirect costs. Direct costs are identified with and can be traced to a cost object. For example, the cost of wood used to make guitars is a direct cost. Indirect costs cannot be identified with or traced to a cost object. For example, the salaries of production supervisors are indirect costs of producing a guitar because their salaries cannot be identified with or traced to any individual guitar. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Direct Costs of Legend Guitars

Indirect Costs of Legend Guitars

Classifying Direct and Indirect Costs

Thus, the cost of a finished product includes:
Manufacturing Costs The cost of a manufactured product includes the cost of materials used in making the product. In addition, the cost of a manufactured product includes the cost of converting the materials into a finished product. Thus, the cost of a finished product includes: Direct materials cost Direct labor cost Factory overhead cost ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Manufacturing Costs of Legend Guitars

Direct Materials Cost Manufactured products begin with raw materials that are converted into finished products. To be classified as a direct materials cost, the cost must be both of the following: An integral part of the finished product A significant portion of the total cost of the product Examples of direct materials costs include the following: The cost of the wood used in producing a guitar The cost of electronic components for a television Silicon wafers for microcomputer chips Tires for an automobile ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Direct Labor Cost Most manufacturing processes use employees to convert materials into finished products. The cost of employee wages that is an integral part of the finished product is classified as direct labor cost. A direct labor cost must meet both of the following criteria: An integral part of the finished product A significant portion of the total cost of the product Examples of direct labor costs include the following: The wages of employees who cut guitars out of raw lumber and assemble them Mechanics’ wages for repairing an automobile Machine operators’ wages for manufacturing tools Assemblers’ wages for assembling a laptop computer ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Factory Overhead Cost (slide 1 of 2)
Costs other than direct materials cost and direct labor that are incurred in the manufacturing process are combined and classified as factory overhead cost (sometimes called manufacturing overhead or factory burden). All factory overhead costs are indirect costs of the product. Some factory overhead costs include the following: Heating and lighting the factory Repairing and maintaining factory equipment Property taxes on factory buildings and land Insurance on factory buildings Depreciation of factory plant and equipment ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Factory Overhead Cost (slide 2 of 2)
Factory overhead cost also includes materials and labor costs that do not enter directly into the finished product. Examples include the cost of oil used to lubricate machinery and the wages of janitorial and supervisory employees. Also, if the costs of direct materials or direct labor are not a significant portion of the total product cost, these costs may be classified as factory overhead costs. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Direct Materials, Direct Labor, and Factory Overhead
Identify the following costs as direct materials (DM), direct labor (DL), or factory overhead (FO) for a baseball glove manufacturer: Leather used to make a baseball glove Coolants for machines that sew baseball gloves Wages of assembly line employees Ink used to print a player’s autograph on a glove ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Prime Costs and Conversion Costs
Direct materials, direct labor, and factory overhead costs may be grouped together for analysis and reporting. Two such common groupings are as follows: Prime costs, which consist of direct materials and direct labor costs Conversion costs, which consist of direct labor and factory overhead costs Conversion costs are the costs of converting the materials into a finished product. Direct labor is both a prime cost and a conversion cost. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Prime Costs and Conversion Costs

Prime and Conversion Costs
Identify the following costs as a prime cost (P), conversion cost (C), or both (B) for a baseball glove manufacturer. Leather used to make a baseball glove Coolants for machines that sew baseball gloves Wages of assembly line employees Ink used to print a player’s autograph on a glove ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Product Costs and Period Costs (slide 1 of 2)
For financial reporting purposes, costs are classified as product costs or period costs. Product costs consist of manufacturing costs: direct materials, direct labor, and factory overhead. Period costs consist of selling and administrative costs. Selling expenses are incurred in marketing the product and delivering the product to the customer. Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Examples of Product Costs and Period Costs—Legend Guitars

Product Costs and Period Costs (slide 2 of 2)
As product costs are incurred, they are recorded and reported on the balance sheet as inventory. When the inventory is sold, the cost of the manufactured product sold is reported as cost of goods sold on the income statement. Period costs are reported as expenses on the income statement in the period in which they are incurred, and, thus, they never appear on the balance sheet. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Product Costs, Period Costs, and the Financial Statements

Product and Period Costs
Identify the following costs as a product cost or a period cost for a baseball glove manufacturer: Leather used to make a baseball glove Cost of endorsement from a professional baseball player Office supplies used at the company headquarters Ink used to print a player’s autograph on a glove ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial Statements for a Manufacturing Business
The retained earnings and cash flow statements for a manufacturing business are similar to those for service and merchandising businesses. However, the balance sheet and income statement for a manufacturing business are more complex. This is because a manufacturer makes the products that it sells and, thus, must record and report product costs. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Balance Sheet for a Manufacturing Business
A merchandising business reports only Merchandise Inventory on its balance sheet. In contrast, a manufacturing business reports three types of inventory on its balance sheet as follows: Materials inventory (sometimes called raw materials inventory) consists of the costs of the direct and indirect materials that have not yet entered the manufacturing process. Work in process inventory consists of the direct materials, direct labor, and factory overhead costs for products that have entered the manufacturing process, but are not yet completed (in process). Finished goods inventory consists of completed (or finished) products that have not been sold. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Balance Sheet Presentation of Inventory for Manufacturing and Merchandising Companies

Income Statement for a Manufacturing Business (slide 1 of 8)
The income statements for merchandising and manufacturing businesses differ primarily in the reporting of the cost of merchandise (goods) available for sale and sold during the period. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Income Statements for Merchandising and Manufacturing Businesses

A merchandising business purchases merchandise ready for resale to customers. The total cost of the merchandise available for sale during the period is determined as follows: The cost of merchandise sold is: ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A manufacturer makes the products it sells, using direct materials, direct labor, and factory overhead. The total cost of making products that are available for sale during the period is called the cost of goods manufactured. The cost of finished goods available for sale is determined as follows: The cost of goods sold is determined as follows: ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cost of goods manufactured is required to determine the cost of goods sold and, thus, to prepare the income statement. The cost of goods manufactured is often determined by preparing a statement of cost of goods manufactured. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The statement of cost of goods manufactured is prepared using the following three steps: Step 1. Determine the cost of materials used. Step 2. Determine the total manufacturing costs incurred. Step 3. Determine the cost of goods manufactured. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Flow of Manufacturing Costs

Using the data for Legend Guitars, the cost of materials used, total manufacturing costs, and cost of goods manufactured are computed as follows: Step 1. The cost of materials used in production is determined as follows: Step 2. The total manufacturing costs incurred is determined as follows: Step 3. The cost of goods manufactured is determined as follows: ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Manufacturing Company—Income Statement with Statement of Cost of Goods Manufactured

Cost of Goods Sold, Cost of Goods Manufactured (slide 1 of 2)
Gauntlet Company has the following information for January: For January, determine (a) the cost of goods manufactured and (b) the cost of goods sold. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cost of Goods Sold, Cost of Goods Manufactured (slide 2 of 2)

Uses of Managerial Accounting
Managerial accounting provides information and reports for managers to use in operating the business. Managerial accounting provides the cost of manufacturing a product, which can be used to determine its selling price. Managerial accounting allows for comparing the costs of manufacturing products over time and can be used to monitor and control the cost of direct materials, direct labor, and factory overhead. Performance reports allow management to identify any large amounts of scrap materials or employee downtime. A report could analyze the potential efficiencies and dollar savings of purchasing computerized equipment to speed up the production process. A report could analyze how many units need to be sold to cover operating costs and expenses. Such information could be used to set monthly selling targets and bonuses for sales personnel. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

16 Managerial Accounting Concepts and Principles

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